Auto Lending to Get a Boost From Sandy

Many victims of Hurricane Sandy are still cleaning up and trying to put their lives back together four months after the storm’s destructive floods wiped out entire communities.

In addition to leveled homes, some experienced a complete totaling of their vehicles caused by falling debris and flood waters.

Despite the continued cleanup from the storm and an economy on the mend, auto sales are still expected to rise nearly 7% in 2013 over the previous year, with car buyers set to register 15.3 million new vehicles this year, according to auto industry research firm Polk.

For credit unions, new light vehicle sales remain strong following Sandy in the Northeast with stronger new vehicle loan demand on the rise. Indeed, in November 2011, the new vehicle loan portfolio was contracting at an 8.7% annual rate. However as of November 2012, new car loans were up 7.7% or $4.6 billion.

A trifecta of conditions may be behind the burst of new car loans: Sandy, more drivers replacing their older cars, which are now at the average age of 10.8 years, and falling interest rates.

“There should also be a continued loosening of credit and more release of pent up demand now that the election year is in the books,” said Richard Epley, CEO of Auto Financial Group, a Houston-based provider of online residual-based vehicle financing. “We think that consumer confidence should be pretty strong now that the federal government has at least settled on our tax laws for now.”

As demand strengthens, manufacturers are reducing incentives, including subsidized financing, said Dave Colby, chief economist for CUNA Mutual Group. Higher demand and less competition from subsidized lenders are major changes in the vehicle sales and financing environment, he added. Credit unions are well-positioned to meet this demand.

“Never have members’ and credit unions’ interests been so aligned. Members need to replace vehicles or old vehicle loans, and credit unions need to make loans,” Colby said. “While economic recovery isn’t robust, the simple fact that there are 134 million jobs, speaks well about the ability to repay.”

Looking out to the next 12 to 18 months, Colby said he sees the Federal Reserve intentionally managing interest rates at low levels. Manufacturers also want to improve profit margins per vehicle and they will likely be less generous with financing subsidies, he noted. Finally, consumer sentiment regarding future employment conditions is expected to be stable or strengthen slightly.

“Nothing in our interest rate forecast says that credit unions will be able to earn a positive spread on short-term investments, thus growing shorter duration loans is the primary alternative,” Colby said.

There will certainly be an increase in car loans in 2013 as well as an extra 500,000 or so of relatively low-mile, high-quality off-lease vehicles, said Dave Ruggles, AFG’s vice president of dealer initiatives. It is expected that a higher number of rental car turn-ins will also hit the market as that fleet needs to be replenished with new vehicles, he pointed out.

“I believe that pent-up demand and easier financing will absorb those vehicles easily, still leaving the market with a shortage of inventory, vis-à-vis demand. This will keep residual values firm,” Ruggles said.

Looking closer at the potential opportunities for credit unions to boost their new car loan activity, one needs only to glance at an industry pie chart. Colby said when you consider roughly 38% of all credit union assets are in investments, and 45% of these investments are in cash or have a duration of one year or less, this translates into at least 17% of credit union assets earning a negative spread.

“In fact, you would have to go out to a five-year Treasury to cover cost-of-funds. Thus, a vehicle loan at 3.51% is a great deal for the member and the credit union,” Colby said. “Even a loan sale with a 1.99% rate is better for the credit unions’ bottom line than the investment alternative.”

Even as Sandy may have forced hurricane victims to shop for new or used cars, there is a danger lurking that damaged vehicles may still find their way onto dealer lots across the country. In December, Experian Automotive warned there were more than nine million vehicles registered in counties affected by Hurricane Sandy.

While it is hard to pinpoint the total number of cars damaged by the storm, 1.6 million cars and trucks throughout the United States were designated as damaged by accidents or severe weather, including hurricanes, tornadoes or flooding in the first half of 2012, the company said. Of those, more than 425,000 or nearly 27%, lost their damage designation, or brand, when they were retitled as clean in another state, according to Experian Automotive.

Still, barring any untoward hiccups from Washington or unforeseen calamities around the world, the auto industry should lead the general economy toward a stronger recovery in 2013, Ruggles said.

“We will hear complaints about capacity restrictions, an about face from previous times when the market had to be forced to use overabundant capacity,” he predicted.

Colby is optimistic about the opportunities for credit unions to compete even more this year.

“I should emphasize I am not talking about just the financing on purchases of new and used vehicles, I am also talking about re-writing loans held elsewhere, with better terms from credit unions,” Colby said. “A key target for this strategy is the new members who switched to a credit union in the past year, due to frustrations with their bank relationships.”